Sweden's Riksbank Signals More Hikes After Raising Rates On Weaker Krona

(RTTNews) - Sweden's central bank raised the key interest rate by 25 basis points on Thursday, as signaled in the previous policy session, and guided that rates are likely to be raised at least one more time this year as inflation remains too high and, rising services prices and a weaker krona suggest price pressures are falling at a slower than expected pace. The Riksbank also decided to increase the pace of government bond sales from SEK 3.5 billion to SEK 5 billion per month with effect from September this year.

The Executive Board, led by Governor Erik Thedeen, raised the policy rate by 0.25 percentage points to 3.75 percent. The central bank started tightening its policy in April 2022, when the policy rate was zero percent.

"The Riksbank's policy rate increases are having an effect, but for inflation to return to the target of 2 per cent within a reasonable period of time, monetary policy needs to be tightened further," the bank said in a statement.

"The forecast is for the policy rate to be increased at least one more time this year," the bank added. "It is still uncertain how much monetary policy tightening will be required for inflation to fall back and stabilise close to the target of 2 percent," the Riksbank said.

Inflation, excluding energy prices, is falling slowly and remains slightly higher than expected, mainly due to the unexpected rapid rise in service prices, which may reflect that demand pressures remain high in parts of the Swedish economy, the bank said.

With a weak krona contributing to keep inflation up, and there is a risk that the pass-through of the krona to price increases is larger in the current situation of high inflation, the bank noted. Policymakers hope that the increased sale of government bond holdings may contribute to a stronger krona and improve the central bank's capacity to reduce inflation. The Riksbank maintained that if monetary policy needs to be tightened further, policy rate rises are the main and most effective tool.

The central bank retained the CPI inflation projection for this year at 8.9 percent, but raised the outlook for next year to 4.3 percent from 4.0 percent. The forecast for CPIF inflation, which is the inflation target for the Riksbank and is measured on the CPI with a fixed interest rate, was also retained at 5.9 percent for this year, while the outlook for next year was raised slightly to 2.4 percent from 2.3 percent. The Riksbank expects the Swedish economy to shrink 0.5 percent this year, which is less severe than the 0.7 percent contraction projected in April. The economy is forecast to stagnate next year, which is a downgrade from the 0.2 percent growth expected earlier. The policy rate is forecast to reach 4.05 percent in the second quarter of 2024, which is higher than the 3.65 percent projected in April.

ING economists expect a rate hike in September. However, if the Fed and ECB have paused rate hikes by the fourth quarter, then the Riksbank might be content with keeping rates on hold in November, they added.

Ultimately Swedish policymakers face a growing trade-off between hiking to bolster its ailing currency, and avoiding a deeper correction in the housing market, ING economists pointed out.

The pass-through from higher rates has been more rapid as Sweden has a much higher share of variable rate mortgages than its peers across Europe, they noted.